ICC Trade Loss Registry – Not Credible to Investors in Trade Receivables
I know I won’t be popular with this post, but I never choose the popularity route. To me, I’ll take quality over quantity any day. And so I have to point out that I think the 2014 International Chamber of Commerce (ICC) Trade Register Report has a ways to go. The report concluded trade transactions for all intent and purposes have practically zero losses. That’s right -- zero losses. The press release stated,
Based on data contributed by the major global commercial banks and reflecting more than 4.5 million transactions totalling an exposure in excess of US$2.4 trillion, the ICC Trade Register Report 2014 (“the Trade Register”) empirically demonstrates that trade finance is lower risk than many other types of financing and assets. It records that short-term trade finance customer default rates range from a low of 0.033% to a high of 0.241%, which is a fraction of the 1.38% default rate reported by Moody’s for all corporate products (according to 2012 figures). tweet
The problem is that the people who matter don’t believe it. Who matters? Well, investors matter. And if investors don’t find your data credible just because the banks say so, then they will buy something else.
I mean, saying we’ve never had a default in 10 years (I’ve heard this quote from several bankers) over the years or that your defaults are 10 times better than AAA credits will appear nonsensical to the market.
Go ask the banks that funded copper sitting in warehouses (supposedly) in Chinese ports. Or go ask Citibank about their $400 million trade frauds in Mexico.
Listen, you can’t fool sophisticated investors (or maybe you can, look at the subprime fiasco).
What the ICC report is saying is that absolute trade losses are low. The ICC Trade Loss Registry is a great step, but needs to go further.
Let’s look at some of the arguments:
- Trade loss data suffers from product switch. Product switch occurs when the trade transaction is paid but the money moves to an overdraft facility.
- If a borrower defaults, does their trade not default? In absolute, trade transactions are paid. It tells you nothing about what happens in the event of a default
- Data from SWIFT captures L/C traffic for the bank-intermediated trade finance market, which are unfunded off balance liabilities.
- No data is captured for inter-firm trade credit, which is now being financed by third parties such as hedge funds.
- The Banking industry relies on self-reported surveys, and responses are open to question as respondents only provide directional estimates.
- There are no specific definitions on what self-liquidating means.
The initial intention of this registry was to prove to regulators that trade is lower risk and hence should receive preferential capital allocations. The banks pretty much lost that battle.
If trade was as good as the claims, than banks would have unlimited bank lines to banks in Pakistan, Ecuador, etc. They don’t.
Conning trade finance managing director Adam Dener stated in the Trade & Forfait Review “There is limited historical data on trade-finance assets – or for that matter on trade securitisations – as banks have yet to fully document this activity. In addition, more work needs be done to increase the ICC Banking Commission's Trade Finance Register's thoroughness, usability, scale, and credibility.”
So yes, it’s nice to finally have a few years of low losses demonstrated by the registry, but dont convince me, convince the people that matter, and that’s investors. The only way I believe we can do this is to go out and look at some bankruptcies and show trade claims were paid at a higher rate. Otherwise, we continue to put forth bank data that gets “analyzed” to show what the banks want us to believe. Haven't we traveled this path before? We need some collective push back to the ICC to get this right. Otherwise investors either stay away or buy things with false pretenses.
P.s. I would like to invite you to receive our Trade Financing Matters Weekly Digest by signing up here https://spendmatters.com/tfm/weekly-tfm-digest/